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Disgraced lab’s malpractice suit tossed


A Virginia judge has blocked a lawsuit filed by the CEO of a now-defunct and discredited lab company that accused a big national law firm—which had announced only a day earlier that it would begin winding down its own operations—of committing malpractice. 

The former head of Health Diagnostic Laboratory, Tonya Mallory, contended that she had received bad advice from attorneys at LeClairRyan about a physician-payment plan for lab orders, leading to a $111 million civil judgment against her under the federal False Claims Act.

But Richmond Circuit Judge C.N. Jenkins Jr. ruled that Mallory couldn’t pursue her claim against the firm, citing a 2018 verdict by a South Carolina federal jury which found that she had knowingly violated a federal anti-kickback law by authorizing physician payments.

The Aug. 8 ruling brought a bit of good news for embattled LeClairRyan after the firm announced that it planned to go out of business and was actively coordinating its dissolution.

Mallory’s suit arose out of a tangled series of lawsuits spawned by the collapse of her Richmond-based HDL laboratory service. Her relationship with LeClairRyan was spurred by her longstanding relationship with firm co-founder Dennis Ryan, who helped Mallory incorporate HDL in 2008, according to the court’s opinion.

As a blood testing service, HDL relied on physician agreements for a steady stream of blood samples to test. LeClairRyan prepared written agreements whereby the doctors would receive processing and handling fees as reimbursement for their costs related to the samples, Jenkins wrote.

The law firm repeatedly advised Mallory that the agreements did not run afoul of federal anti-kickback laws or expose Mallory or her company to liability under the FCA.

The feds took a different view, however. The Office of Inspector General issued a special fraud alert about the HDL physician agreements, citing the FCA and the Anti-Kickback Statute. The Justice Department took Mallory and HDL to court.

As Jenkins cited the allegations, “Mallory relied on legal advice from Defendant, which ‘led to catastrophic results,’ including the District Court action for violations of the FCA and AKS.” HDL settled with the feds for $47 million and then filed for bankruptcy in 2015.

The bankruptcy trustee sued LeClairRyan, which settled for $20.3 million. The trustee also went after Mallory, demanding more than $600 million.

Mallory, in turn, sued LeClairRyan in 2017 for legal malpractice, seeking $603 million. Her damage claims were based on pending actions in both the bankruptcy court and the U.S. District Court in South Carolina, both of which were later resolved.

In the district court litigation, the jury found Mallory and others liable under the FCA. U.S. District Judge Richard Gergel entered judgment against Mallory and two others in the amount of $111,109,655.30.

LeClairRyan demurred to Mallory’s Virginia lawsuit, arguing that the outcome of the federal FCA case was inconsistent with “good faith reliance on advice of counsel.” Jenkins looked to federal common law to apply the doctrine of collateral estoppel despite a lack of mutuality of parties and ruled that collateral estoppel barred the suit. 

“Plaintiff asserts that the injuries she sustained were directly and proximately caused by Defendant’s legal advice. The District Court previously determined, however, that Plaintiff’s conduct was knowing and willful, and therefore, not based on Plaintiff’s reliance on the advice of counsel. Consequently, the good faith reliance issue, which is relevant to the causation element in this case, has been previously litigated and determined in the District Court case. According, Plaintiff cannot now relitigate the issue,” Jenkins wrote.

Alternatively, Jenkins said Mallory was contributorily negligent since she “is at least partially responsible for the injuries she sustained.”

LeClairRyan general counsel Lori D. Thompson said that the firm was very pleased with the court’s decision, while Mallory’s attorney, Robert T. Hall of Reston, Virginia, said this his client was evaluating her options.

“We anticipate making some decisions in the very near future,” Hall said. “If I were to make a prediction, it is unlikely this case will end at this time.”

Yesterday’s future, today

As the state court action came to a close, LeClairRyan was reportedly close to ending malpractice litigation in Chicago federal court. The firm had represented a fast food equipment supplier defending a trademark infringement suit.

The company claimed LeClairRyan botched a litigation hold and mishandled discovery issues, causing it to settle for far more than necessary. A U.S. district judge denied a motion to dismiss on Feb. 12, 2018.

Court records showed the parties appeared in court Aug. 1 and advised that they had reached a resolution and needed time to finalize it.

LeClairRyan’s impending demise invited analysis of its failings. Former firm lawyers told Bloomberg Law that founder Gary LeClair envisioned a new law firm structure, one contemplating investment by non-lawyers. That practice has never been accepted by bar regulators in any state.

Another LeClair innovation was use of a preferred stock option for shareholders, over and above their ownership of common stock. One lawyer told the publication the extra money was put into supplemental retirement accounts or used to “patch holes in the budget.”

Partners reportedly stopped buying preferred stock shares as the firm started missing budget.

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